Is the bear market in coffee futures here to stay? Celeste Skinner of Dukascopy asked commodity broker Carley Garner.
1. Robusta coffee futures are heading for the largest five-day slide since July 2011 in London, a move which has taken hedge funds by surprise. How long do you think this bearish trend will continue?
The coffee futures market has a tendency to rally ahead of the Brazilian freeze season as markets build in a weather risk premium, but on most years that premium turns out to be unnecessary. What we are seeing now is the coffee market reverting back to pre-weather risk levels. In my opinion, although coffee is clearly technically oversold the overall direction of prices will remain lower in the coming month or two. The seasonal liquidation of speculators positioned in hopes of a coffee freeze or some other type of harvest concern generally extends into June and in some cases even July.
2. According to an analyst at Rabobank International, “the Robusta bull market could be over for the rest of the year.” What are your thoughts?
I’m not ready to go as far as to say the coffee bull is dead through the year end, but I do think it is probably dead for the time being. The Brazilian harvest will start next month and be in full-force in June. We generally see prices dribble lower during the harvest. Also, there are demand concerns in a market that appear to be amply supplied. That said, we do believe a short-term technical bounce could lift prices into the mid-to-low 140s, but the buying will likely dry up there. According to the Commitments of Traders Report, large speculators are still holding a net long position in coffee and they will likely be looking to unload their holdings as we move into the Brazilian harvest.
3. Brazil is expected to deliver a monstrous crop for 2018, and the 2016-17 harvest is also meant to be above average. Do you think there is any chance Brazil may not deliver, and if they don't, could we see a severe correction?
There is always a chance that projected supply will turn out to be incorrect. We cannot predict Mother Nature, nor can we accurately predict economic cycles. Thus, it is never a good idea to get too comfortable with a fundamental bias regardless of how overwhelming the bearish data might be. It is important to keep in mind that fundamental stats regarding supply and demand lag dramatically and things change quickly. Accordingly, it is important to keep an eye on the coffee futures chart for potential changes in sentiment. The market will start to move far before the fundamental data explains a trend change.